Compute the return on investment (ROI) for each division, using the formula stat

Question

Compute the return on investment (ROI) for each division, using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Compute the residual income for each division. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required.)

Assume that each division is presented with an investment opportunity that would yield a rate of return of 29%.

If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Selected sales and operating data for three divisions of three different companies are given below:

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Margin = Net Operating Income/Sales*100

Division A = 467200/7300000*100 = 6.40%

Divison B = 1175200/11300000*100 = 10.40%

Divison C = 379600/10400000*100 = 3.65%

Turnover = Sales/Average Operating Assets

Division A = 7300000/1460000 = 5

Division B = 11300000/5650000 = 2

Divison C = 10400000/2080000 = 5

ROI = Margin*Turnover

Division A = 6.40*5 = 32%

Division B = 10.40*2 = 20.80%

Division C = 3.65*5 = 18.25%

Part B:

Residual Income = Net Income - Required Rate of Return*Net Operating Assets

Division A = 467200 - 27%*1460000 = 73000

Division B = 1175200 - 20.8%*5650000 = 0

Divison C = 379600 - 24%*2080000 = -119600

Part C:

a)

Divison A will probably Reject.

Divison B will probably Accept.

Divison C will probably Accept.

b)

Divison A will probably Accept.

Divison B will probably Reject.

Divison C will probably Accept.

Thanks.

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